U-Verse, Line Losses Dog AT&T

The spin might say AT&T did a good job of cutting costs this past quarter, but there’s no hiding the tough road ahead as Ma Bell remakes itself. Buried inside Thursday’s earnings call were hints of how hard that immediate task is, as AT&T continues to lose landlines at a fast clip while struggling to build out its IPTV infrastructure.
ATTOverall, analysts cheered AT&T’s numbers (a 17 percent increase in profit), with some pleasantly surprised at the company’s ability to cut costs. But there’s no shining up the fact that AT&T lost 227,000 phone lines during the quarter — that’s almost 2,500 disconnects a day!
And on the IPTV front, AT&T expects its slowed U-verse rollout to increase its drag on earnings, to somewhere between 9 and 11 cents per share in 2007, roughly a $600 million expense that is almost all customer-acquisition costs, according to one analyst who follows the company. The good news — the Cingular and BellSouth businesses are in top shape, and DSL subscriptions are also up — black ink that should help calm the rough waters in video and POTS.
The company’s big bet for the future, its LightSpeed fiber infrastructure and U-verse IPTV offering, remain mostly stalled from a revenue-generating front as AT&T struggles to roll the service out. On the conference call, CFO Rick Lindner declined to put a guesstimate on how many U-verse subscribers the company would sign up this year, a balk that might mean the company isn’t quite back on its original rollout schedule. “We want to get the product into markets and open up channels,” said Linder. “It’s premature to put [subscriber] numbers out there yet.”
(Which means it’s way way premature to think about revenues, right?)
Additionally, UBS analyst John Hodulik noted that AT&T’s predicted 9-to-11-cents per share drag that U-verse will slap on 2007 earnings — roughly $600 million, with the BellSouth shares counted in — is mostly customer acquisition cost, since equipment costs are largely capitalized, he said. Still, the drag is “lower than we thought,” so UBS, like other analysts, has a positive outlook on AT&T’s overall future, with a buy rating and a $40 target. AT&T closed Thursday at $36.79 per share, up 16 cents on the day.
AT&T CEO Ed Whitacre said the telecom colossus now expects to save $22 billion in costs related to its recently approved BellSouth merger, up from earlier estimates of $18 billion. Part of that savings will come out of equipment providers’ hide, as AT&T said it expects to realize $300 to $400 million per year in capex savings due to equipment consolidation.